TRANSFERRING WEALTH IN YOUR ESTATE PLAN: HOW MUCH CAN YOU TRANSFER TAX FREE? Transfer as Much Wealth as Possible with Your Comprehensive Estate Plan Without Incurring Gift and Estate Taxes
LAW OFFICES OF BARTON P. LEVINE www.bartonlevine.com Transferring Wealth in Your Estate Plan - How Much Can Transfer Tax Free?
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Deciding who will inherit your wealth when you die remains the primary purpose of any estate plan; however, a comprehensive estate plan frequently includes secondary goals and objectives as well. One of those goals is to transfer as much wealth as possible without incurring federal (and in some cases state) gift and estate taxes. With the recent passage of the American Taxpayer Relief Act of 2013, or ATRA, many of the rules regarding this tax have changed and/or been made permanent making it even more important that you have at least a basic understanding of how gift and estate taxes will impact your estate plan.
WHAT IS THE FEDERAL GIFT AND ESTATE TAX? In the United States, just about everything is subject to taxation – including your estate at the time of your death. The gift and estate tax is a federal tax that is imposed on your estate assets when you die if those assets qualify. As a result of the passage of ATRA, the rate at which estates are taxed has permanently been fixed at 40 percent. As you can see, your estate can lose almost half of its value unless you plan ahead to ensure that your estate does not trigger the payment of gift and estate taxes. As the name implies, the gift and estate tax also involves gifts made during your lifetime. The Internal Revenue Service, or IRS, expects you to keep track of gifts you make during your lifetime so that your executor will know how much of your lifetime exclusion you have used through gifting at the time of your death.
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LIFETIME EXCLUSION The lifetime exclusion allows each taxpayer to exclude assets valued up to the exclusion limit from the calculation of gift and estate taxes. ATRA set the lifetime exclusion amount at $5 million; however, it is adjusted each year for inflation, meaning that for 2013 the lifetime exclusion limit was $5.25 million. This is the amount of assets that you may transfer, either through lifetime gifting or at death, without incurring gift and estate taxes. For example, if Bob has an estate valued at $6 million at the time of his death, and gifted assets valued at $2 million during the course of his lifetime, he would have an estate valued at a total of $8 million for the purpose of calculating gift and estate tax. Therefore, $2.75 million would be subject to taxation ($2 million + $6 million = $8 million - $5.25 million = $2.75 million). Bob’s estate would then owe $1.1 million in gift and estate taxes ($2.75 million x 0.40 = $1.1 million).
UNLIMITED MARITAL DEDUCTION For a married couple, one way to avoid paying gift and estate taxes upon the death of the first spouse is to use the unlimited marital deduction. This allows you to transfer an unlimited amount in assets to your spouse without incurring federal gift and estate taxes. A recent U.S. Supreme Court decision has now made the unlimited marital deduction available for same-sex married couples as well. Because this deduction has historically not applied to same-sex couples, if you are in a
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same-sex marriage you may wish to discuss how the deduction impacts your estate plan. Although the deduction is now available to same-sex married couples, it does not apply if your spouse is not a U.S. citizen. If you are married to a foreign national, it is crucial that you do not rely on the unlimited marital deduction in your estate plan. While the unlimited marital deduction is a simple way to avoid paying gift and estate taxes upon the death of the first spouse in a marriage, it can wreak havoc on the estate of the surviving spouse. Imagine, for instance, that Bob and Mary are married. Bob has assets worth $6 million and Mary has assets valued at $4 million. To avoid incurring estate taxes, Bob leaves everything to Mary when he dies. Although gift and estate taxes have been avoided, Mary now has an estate worth $10 million -- $4.75 million over the lifetime exclusion limit. Essentially, a $1.9 million tax bill has just been shifted to Mary’s estate.
PORTABILITY Portability may be the solution to Mary’s problem in the above scenario. Although never actually referred to by the name “portability” in ATRA, the concept involves one spouse being able to use a deceased spouse’s lifetime exclusion if any portion remained unused at the time of death. In Bob and Mary’s case, when Bob died he left everything to Mary, meaning that he only used $2 million of his lifetime exclusion limit as a result of the lifetime gifts he made. Therefore, Mary may use the remaining $3.25 million of
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Bob’s lifetime exclusion amount when she dies. As a result, Mary may now exclude $8.5 million ($5.25 + $3.25= $8.5) from her estate before her estate will owe gift and estate taxes. Because their combined assets are worth $10 million, Mary’s estate will now owe gift and estate taxes on $1.5 million ($10 million - $8.5 million = $1.5 million) instead of owing taxes on the $4.75 million that would be owed if portability was not an option. As a result Mary’s estate will owe $600,000 in gift and estate taxes instead of $1.9 million.
YEARLY EXEMPTION Another estate planning strategy that should be used to transfer wealth is the yearly exemption from gift and estate taxes. This allows each taxpayer to make gifts of up to $14,000 to as many beneficiaries as he or she wishes each year. These yearly gifts are exempt from gift and estate tax and do not count toward the lifetime exclusion calculation. In addition, giftsplitting allows a married couple to combine their yearly exemptions to gift assets valued at $28,000 to beneficiaries. Just to get an idea how this option can significantly lower your estate’s exposure to gift and estate taxes, imagine that Mary started using the yearly exemption the year Bob died to make gifts to their three children and five grandchildren. Mary would then be transferring $112,000 per year tax-free. Imagine further than Mary lived ten years after Bob’s death. Mary would be able to transfer $1.12 million tax-free prior to death lowering the value of her estate from $10 million to $8.88 million at her death. Because Mary can exclude $8.5 million by using her own lifetime exclusion and the remaining portion of
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Bob’s through portability, Mary’s estate will now only owe gift and estate tax on $380,000 ($8.88 million - $8.5 million = $380,000) further reducing her estate’s tax obligation from $600,000 to $152,000 ($380,000 x 0.40 = $152,000). Through careful estate planning and the use of available strategies, Bob and Mary’s estates saved almost $1.75 million in gift and estate taxes. There are numerous other strategies that can be used to reduce your estate’s exposure to gift and estate taxes. The important point to remember is that doing nothing can result in your estate losing a significant portion of its value to taxes. That, in turn, means that your loved ones lose assets that were intended for them.
REFERENCES Forbes, After The Fiscal Cliff Deal: Estate And Gift Tax Explained IRS, What’s New—Estate and Gift Tax Wealth Counsel, Understanding the Impact in 2012 & 2013 of Federal Estate Tax Laws
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About the Author Barton P Levine For more than 30 years, Bart Levine has been the principal member of the Law Offices of Barton P. Levine. Mr. Levine specializes in estate planning, probate and estate administration, bankruptcy representation, special needs planning, medicaid planning, guardianship representation, elder law representations and real estate representation. Mr. Levine presents free educational seminars to the public throughout the greater New York City metropolitan area. These seminars are intended to educate the public about the importance of proper estate planning. Seminar topics include Basic Estate Planning, Asset Protection, Special Needs Planning, Medicaid Planning, Estate Planning for the GLBT Community, IRA Planning and many others. Mr. Levine also presents continuing education courses to the professional community. Experience Mr. Levine has been a member of the New York Bar since 1973. Mr. Levine is also admitted to practice law before the federal courts of the Southern and Eastern Districts of New York. Mr. Levine is a member of the American Academy of Estate Planning Attorneys (AAEPA) and the New York State Bar Association, Trusts & Estates Division Law Offices of Barton P. Levine Main Office: 260 Madison Avenue, 17th Floor New York, NY 10016 Toll Free: (888) 268-4425 Fax: (212) 268-6267 Email: blevine@bartonlevine.com Website: www.bartonlevine.com
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